“The growth will be driven by a confluence of factors. While large capital expenditure (capex) in the infrastructure and corporate sectors, growing attractiveness of the infrastructure sector for bond investors and strong retail credit growth are expected to boost bond supply, rising financialisation of household savings should drive demand.”
After clocking a compound annual growth rate (CAGR) of ~9 per cent over the past five fiscals, the Indian corporate bond market appears set for even faster growth, said a report by CRISIL Ratings. According to the report, the bond market size is expected to grow by more than twice from ~Rs 43 lakh crore as of last fiscal to Rs 100-120 lakh crore by fiscal 2030.
“The growth will be driven by a confluence of factors. While large capital expenditure (capex) in the infrastructure and corporate sectors, growing attractiveness of the infrastructure sector for bond investors and strong retail credit growth are expected to boost bond supply, rising financialisation of household savings should drive demand. Regulatory interventions are helpful, too,” said Somasekhar Vemuri, Senior Director, CRISIL Ratings.
Capex in the infrastructure and corporate sectors, it added, is expected to be driven by decadal-high-capacity utilisation, healthy corporate balance sheets and strong economic outlook. CRISIL foresees capex of ~Rs 110 lakh crore in these sectors between fiscals 2023 and 2027, ~1.7 times than that in the past five fiscal years. CRISIL Ratings further expects this pace of capex to continue past fiscal 2027. The corporate bond market is expected to finance a ~sixth of the capex foreseen.
According to the findings of the report, infrastructure assets are becoming strong contenders for investment because of their improving credit risk profile, recovery prospects and long-term nature. Currently, infrastructure constitutes only ~15 per cent of the annual corporate bond issuance by volume. “But structural improvements aided by a raft of policy measures should make infrastructure bond issuances amenable to patient-capital investors — insurers and pension funds — the key investor segment in the bond market,” it said.
Retail credit growth, meanwhile, is expected to maintain pace supported by private consumption growth and formalisation of last- mile credit flow. India’s retail credit market was ~30 per cent of GDP last fiscal, way smaller than that in the developed nations. Retail credit in the US, for instance, was ~54 per cent of its GDP at the end of calendar year 2022. Non-banking financial companies (NBFCs) complement banks to ensure credit flow to untapped segments. The bond market, being a key funding source for the larger NBFCs and accounting for a third of the funding mix, will play an important role in funding retail credit flow. In addition, the revised risk weights announced by the Reserve Bank of India (RBI) for bank exposure to NBFCs can tilt their funding mix in favour of bonds.
On the demand side, CRISIL Ratings said, India is increasingly witnessing financialisation of savings, or a move away from physical assets (such as real estate and gold) to financial assets. The money getting financialised is increasingly being invested in capital market products. Among financial assets, managed investments have clocked a ~16 er cent CAGR, compared with ~10 per cent CAGR for bank deposits over the past five years.
“Managed investments are expected to continue to grow faster than bank deposits. Factors such as increased digitalisation, rising investor sophistication in terms of retirement planning, higher awareness and use of insurance, investment objectives aimed to beat inflation, and a growing middle-income population are contributing to the growth of managed investments,” the report stated.
CRISIL estimates assets in the managed investment segment to double to ~Rs 315 lakh crore by fiscal 2027, and the trend is expected to continue well past fiscal 2027. These investments will be in both equity and debt and a good portion of it may flow to the corporate bond marke, it said.
“The RBI and SEBI have already mandated large borrowers to tap the corporate bond market for incremental borrowings. The recent launch of the Corporate Debt Market Development Fund and the setting up of AMC Repo Clearing Ltd by SEBI will help in improving the secondary market liquidity for institutional investors and thereby boost investor confidence. Growth may get a leg up if the regulators address some key issues, such as relaxing the investment restrictions on corporate bonds rated below ‘AA’ for insurance and pension funds and fortifying the credit default swaps market,” said Ramesh Karunakaran, Director, CRISIL Ratings.
Sources: Financial Express
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